Such an agency is needed, she and the authors say, because the
central idea of Dodd-Frank — greater transparency — falls short
of real reform.

“ 'My major concern about Dodd-Frank is that the basic philosophy
behind it is to improve disclosure, the traditional way of
addressing market failures in a way that is thought to be helpful
but not too intrusive,' says Eric Posner, a
University of Chicago professor and co-author of the paper.

But people tend to ignore the warnings on
drugs, he says, "so we draw the line and say, ‘You
can’t buy that product,’ ” he says.

The authors' proposed Financial Protection Agency would ban
purely speculative products like naked credit-default swaps (when
the holder doesn't own the underlying security) that they argue
add no net value to society.

"Financial instruments could be judged by whether they help
people hedge risks — which is generally beneficial — or whether
they simply allow gambling, which can be costly," Morgenson
writes.

“We tried an experiment with a very radical form of
deregulation that has very little basis in sound economic
science,” E. Glen Weyl, Posner's coauthor, tells
Morgenson. “What we’re advocating is to do the best we can to put
the genie back in the bottle.”

Another assumption the authors make is that banks have
figured out how to game ratings agencies — who in theory
already perform the role of risk evaluator — by making products
technically legal but without actually reducing their inherent
risk.

Morgenson says she's under no illusions that creating such an
agency isn't likely to get far in the current political
environment.

Still, she writes, the paper is a sound rejoinder to those who
believe that complex financial products "are among
America’s great inventions."